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More Liberal Rules on Deducting Your Home Office

		
Jeff Schnepper

		
Decision Center

			
	

	
    






	






    

	

    

	

		


		
		
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Ask the Experts

	
		
			
	


    

	

	
    
		W
		
ould you like to convert money you already spend for your personal living expenses into deductible business expenses? Here's how to finally find tax shelter - in your very own home. 
		

		
		


		
If you use your home for business purposes, many of your personal expenses can be converted into deductible business expenses. For example, when you qualify for an office at home, the following expenses can be deducted:
		

		
		

		
1.  Your "office" furniture and equipment, on a depreciation schedule.

		


		
This would include any desks, chairs, computers, couches, lamps or other furnishings that you put into your office. If you buy a sofa for $1,000 and put it in your family room, it costs you $1,000.  If you're in the 31 percent bracket and you put the same sofa in your home office, the IRS contributes $310 to the purchase of it.
		

		
				


		
In fact, there is a special provision that allows you to deduct as much as $18,500 in 1998 in business furniture and equipment in a single year rather than depreciating it over its "class lifetime." (The "class lifetime" is the number of years the IRS prescribes for the depreciation of the item.) This accelerates the value of the deduction into a single year and gives you, rather than the IRS, the benefit for the time value of the deduction. Note that the limit is for the total value of qualifying furniture and equipment purchased during the year, not a per item limit.
		


		

		
2.  Your entire office, also on a depreciation schedule.?

		


		
If you own your home, rather than rent, you depreciate the portion of the acquisition cost (building only, not land) and improvements related to your home office over a 39-year period. For example, if your house is 2,000 square feet in size and you use 200 square feet of it for your office, you depreciate 10 percent of the cost and improvements to the whole house. If the improvements relate only to the office space, you can depreciate 100 percent of those expenditures. If your home is rented, you can deduct the percentage of your rent that would be for your office on a similar ratio basis.
		

		
		


		
It's important to note that your home office doesn't have to be the whole room; any part of a room could qualify.  In addition, your ratio percentage can be computed on a square footage basis, or, if the rooms are relatively equal in size, on a room basis.
		


		

		
3.  Homeowner's insurance, utilities and related expenses based on the percentage of their use in the home office.

		


		
Maintenance also may be deductible. Repairs to your home office are fully deductible while repairs to the whole house would be deducted on a percentage basis. Moreover, don't forget snow removal and grass cutting. If you qualify for a home office, these expenses would also be allowed on a percentage basis.
		

		
		

		
4.  The costs for a second phone line.

		


		
Unless you have a separate line for business, no part of your basic phone bill can be deducted. However, you can still deduct any long-distance business calls, call waiting and call forwarding, and, of course, the full cost of a second line.
		

		
		


		
Having a qualified home office also allows you a greater auto deduction. Commuting is not deductible. However, with a home office, your commute may be your trip from the bedroom to the basement. All other business trips from your home office may be deductible.
		

		
		


		
You can deduct 31.5 cents per mile in 1998 plus tolls, interest on the business portion of your car (meaning that if you use your car 90 percent for business, 90 percent of the interest would qualify) and parking. Alternatively, you can keep track of all of your auto expenses and deduct the business percentage of the total. Indeed, having a home office increases your "business" use of the vehicle.
		


		


		
How you qualify

		


		
To qualify for a home office, the portion of the home used as an office must be used "exclusively and on a regular basis" for your business needs. To prove "regular basis," just keep a diary of where you were working. That's easy. Be careful about the "exclusive" requirement. The IRS may ask you what percent of the time you use your computer for business as opposed to investment purposes. If your computer is fixed in your home office and you use it at all for investment purposes, the IRS may find that you have failed the exclusive test and disallow your whole home office deduction!   
		

		
		


		
There are three qualifying uses for a home office. You must use the area either as:
		

		
		


		
1.

		
A storage place for goods sold in your business; or
		

		
		


		
2.

		
A place of business where you meet patients, clients or customers; or
		

		
		


		
3.

		
The principal place of your business.
		

		
		


		
The Taxpayer Relief Act of 1997 redefined "principal place of business." Now, even if you do most of your work outside the office, but you still use your home office to handle administrative duties, make phone calls and so on, you can qualify for a deductible home office.  The new law makes one of the best ways to cut your tax bill available to thousands of more people.
		


		


		
How to avoid being audited

		


		
Your "home office business" doesn't have to be your primary occupation. Home offices for second or third businesses qualify as long as there is a profit objective to qualify the activity as a "business." 
		


		


		
Moreover, you may qualify for a home office even if you are an employee, but only if your employer requires you to maintain an office at home as a condition of your employment. While not required, my suggestion is to get a letter from your employer and attach it to your return. If you return is kicked out by the computer, the attached letter may decrease your chances of being audited. It shows you know the law, proves you need the home office, and tells the IRS you're ready to prove it. The IRS is hesitant to initiate audits where they feel the chances of additional revenue are small. The letter puts them on notice that if they mess with you, they're going to lose. 
		

		
		


		
A snapshot of your office

		


		
To prove a home office, have it on your business cards and stationery, keep a log of who you see, when you use the office, and what you do. I recommend that you even have someone photograph you in your home office holding up a newspaper to prove the date, and all of the contents of your office. 
 		

		
		


		
You really don't want an IRS agent actually in your home if you can avoid it. If he does show up, however, make him sign the guest log!green square
		


			
	







    
		
	


	
It's important to note that your home office doesn't have to be the whole room; any part of a room could qualify.
	

	
	


	
Now, even if you do most of your work outside the office, but you still use your home office to handle administrative duties, make phone calls and so on, you can qualify for a deductible home office.   
	


			



	






	

    
		
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